Last week the Court of Appeal finished hearing the long awaited and much anticipated appeal in Jervis and another v Pillar Denton Limited (Game Station) on the hotly contested issue of whether rent is payable as an administration expense. Depending on the decision of the appeal judges this case may trigger a dramatic shift in the way that rent arising during administration is currently treated.
The current position was set out in Goldacre (Offices) Limited v Nortel Networks UK Limited, whereby the High Court held that a landlord was entitled to claim rent falling due after the date of administration in full for the rent quarter as an administration expense. This would be the case notwithstanding that the administrators may only be using a small part of the premises in question and perhaps only for a short period of time. Following this decision was Leisure (Norwich) II Limited v Luminar Lava Ignite Limitedwhich held that rent would not constitute an administration expense if it fell due before the period of administration even where the administrators have caused the company to use the property after appointment for the benefit of the administration.
Therefore, as the law currently stands, the position can be summarised as follows:
- Where rent is payable in advance and an administrator is appointed after the quarter day has passed, the outstanding rent will be deemed to be an unsecured debt. Further, the administrator is entitled to make use of the premises until the next quarter day without having to pay rent to the landlord.
- If an administrator is appointed before the quarter day, and remains in occupation on the quarter day, the rent will be payable in full as an expense of the administration.
The Goldacre and Luminar decisions have been hugely controversial.
The difficulty to date was that both of these decisions were first instance decisions of the English High Court which were binding on the High Court judges. Neither case was appealed.
In the Game Station case the appointment of the administrators took place the day after the March quarter date. Relying upon the first instance decisions of Goldacre and Luminar, the Administrators refused to pay rent that had fallen due pre-appointment and they continued to use the property rent fee. Clearly the landlords of the Game stores viewed this as unjust and inequitable, however, the High Court (bound by Goldacre and Luminar) upheld the actions of the Administrators.
That being said, the High Court did recognise that this issue was of great interest and concern to IPs and Landlords alike and therefore granted permission for the Landlords to appeal the decision to the Court of Appeal.
The Appeal The Appeal on this vexed issue took place over the 12th and 13th February 2014.
The appellant, which consisted of a consortium of Game Landlords, sought to argue that the Court should apply the Lundy Granite principle which is often cited in Liquidation cases (i.e. that if you use the property at all for the benefit of the administration then administrators should pay for the use of such property) and that Goldacre and Luminar should be reversed.
The Court of Appeal has currently reserved its judgment.
To date there has been no indication of what the decision might be or when it will emanate from the Court of Appeal. As such, landlords and IPs will have to wait with baited breath as to the outcome.
A successful appeal will have a significant impact for landlords and administrators. When the judgement is handed down, we shall immediately highlight the implications for IP's, Landlords and the impact upon secured creditors.
No doubt it will cause controversy and further debate within the retail property sector and insolvency sectors.